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4 of the Biggest Financial Scandals & What We Can Learn From Them

Financial scandals have hit news several times recently. Here are 4 of biggest financial scandals in history and what we can learn from them.

Financial scandals have hit the news several times in recent history. Looking at these stories offers a great way to learn some tough lessons and how we can improve our everyday practices as finance professionals.

As accountants, our primary goal is to help keep businesses financially healthy. By observing the mistakes that others have made and, more importantly, how to avoid them, we can be better prepared to face the challenges of the accounting industry.

Here are 4 of the biggest financial scandals in history and what we can learn from each.

1. Charles Ponzi: The Original Ponzi Scheme

Charles Ponzi was born in Italy but lived in Boston during the early 1900s. As you can guess, his crooked tactics were so notable that we still refer to them by his name today. Charles Ponzi, however, didn’t begin by scamming his investors.

Instead, he took advantage of an arbitrage opportunity using the postal service. At the time, you could purchase international reply coupons from the postal service.

When you send a letter, you would include the reply coupon for the recipient. Then, they could take the coupon to a local post office and trade it for an airmail postage stamp. It was like prepaying your recipients’ postage so they could always reply to your letters.

Charles Ponzi gathered a group of people to help him buy reply coupons at a low cost in other countries. Then, Ponzi exchanged them for stamps, sold them at a higher price than the coupons purchased, and pocketed the profits.

He didn’t stop there. Eventually, Ponzi got investors to back his business by promising to double their investment in 90 days. But instead of investing their funds, he simply paid them and himself using funds that new investors were putting into his hands.

He was arrested in 1920 for his unethical tactics. Thus, the Ponzi scheme was born.

Takeaway: How to Avoid Ponzi Scams

It’s always easiest to see a scam in hindsight, but there are some red flags to look out for when investing for yourself or your company. Stay safe and watch out for these indicators:

Clients are not able to view any official documentation regarding their investments
Difficulty selling the investment or pulling money out
Investments that aren’t registered with the SEC
The promise of high returns without much risk
Consistent returns, no matter the state of the economy or market
Lack of detail regarding investment strategies

2. Bernard Madoff: The Largest Ponzi Scheme

Madoff took the idea of a Ponzi scheme and intensified it to create the largest and most detrimental Ponzi scheme in history. Before doing that, Bernard Madoff was a very successful pioneer in the early days of electronic trading. He was even a chairman of Nasdaq in the early 1990s.

He convinced thousands of investors to hand over tens of billions of dollars to his Wall Street investment firm with the promise of significant returns. Instead of investing their funds, he simply deposited them into a bank account. Then, Madoff used the funds he received from new investors to pay returns to other investors.

Eventually, the market took a dive in 2008, and he could not keep up with the fraud. He confessed to his sons about the nature of his business. Madoff’s sons turned him in to the authorities the next day, and Madoff pled guilty to 11 federal felonies.

By the time everything was done, he had defrauded investors of about $64 billion. Madoff was sentenced to 150 years in jail at age 71.

Takeaway: It’s Not Always About Money

Before the scandal, Madoff admitted that he had plenty of money to support an excellent lifestyle for himself and all of his family.

In fact, he was an incredibly successful investment professional before he began this scheme. He didn’t defraud those investors because he was feeling financial pressure.

It reminds us that we don’t always need to look for a financial motive when looking at potential fraud cases throughout our careers.

In fact, sometimes fraud happens when other pressures are put on an employee. If fraud is an easy way to solve the problem and alleviate the stress, the employee might turn to unethical practices.

3. Parmalat: European Dairy Disaster

Parmalat was a thriving Italian dairy giant. The company was often used as a model for a great business in European business schools. Then, Parmalat sparked an audit when they could not make a bond payment.

The auditors discovered that Parmalat had been falsifying financial statements. This included falsely reporting income and billings.

Parmalat had run fake billing documents through shell companies to make it look like they had income and assets. In reality, they didn’t have nearly as much as they were showing.

Parmalat started losing money in the early ’90s when some of its new ventures failed. They sought more cash using bond offerings. The company looked attractive to investors because the shortfalls were hidden in false financial statements.

In the end, Parmalat had a net debt of about €14 billion.

Takeaway: Good People Can Commit Fraud

Calisto Tanzi was Parmalat’s founder and chief executive at the time of the scandal. He was found guilty of fraudulent bankruptcy and criminal conspiracy during the Parmalat trial. However, Tanzi appeared to be a well-rounded citizen in the community before the scandal broke out.

He was always approachable and never flashy, even though he founded one of Europe’s wealthiest companies. Tanzi regularly attended mass each week and always had strong moral values.

As accountants, it’s essential to know that appearances aren’t everything. People can appear to be outstanding citizens, but that doesn’t exempt them from committing fraud.

4. Enron: America’s Troublemakers

Enron was an energy business and had earned the title as one of the most innovative American companies several years in a row before being uncovered for fraud.

This scandal was so large that it prompted a new set of guidelines called the Sarbanes-Oxley Act, also called the “Corporate and Auditing Accountability, Responsibility, and Transparency Act”.

Enron appeared very successful, and its share prices peaked at $90.75. People accepted their success because it was the end of the 1990s and the dot-com bubble had a positive impact on the market.

However, Enron had inflated earnings by several hundred million dollars and hid billions of dollars in debt. Enron’s strategy included off-record accounting practices and using special purpose entities to cover up shortfalls.  Its share price had dropped to just $0.26 at bankruptcy.

Jeff Skilling, the former president, is serving a 24-year sentence. Enron had to pay its creditors more than $21 billion after the uncovered scandal.

Takeaway: Ethics Trumps Success

Although Enron appeared to have the makings of a successful company, it wasn’t all that it seemed. Enron was considered a top innovator for its time.

However, the ethical dilemma that the company leaders faced overcame that success and ultimately put a black mark on the company’s record.

In our own careers, this can remind us to use professional scepticism. It’s easy to look at a company’s success and assume it must be doing everything right. That should give us more reason to dig in a little deeper and ask the tough questions.

Final Thoughts

There have been plenty of financial scandals in recent history to remind us just how important our roles are as accountants.

Whether you’re in a leadership role or simply doing the bookkeeping tasks each day, accountants can significantly impact a company’s ethics.

Remember to ask questions and raise a flag when something seems off. Instead of just doing what is being asked of you, understand the reason behind the numbers.

Alan Lynch
5 min read
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